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Dollar stands tall after US data bolsters Fed rate hike bets

The dollar index, which measures the greenback's value against a basket of six major currencies, last traded at 95.984 , having risen to as high as 96.108 on Friday, its strongest level since Sept. 1.

By: | Singapore | Published: September 19, 2016 8:54 AM
dollar-Reuters-L The so-called core CPI, which strips out food and energy costs, rose 0.3 percent last month, the biggest increase since February. The core CPI increased 2.3 percent in the 12 months through August. (Reuters)

The dollar traded near a two-week high against a basket of major currencies on Monday after U.S. consumer prices rose more than expected in August, bolstering expectations that the Federal Reserve would raise interest rates this year.

The dollar index, which measures the greenback’s value against a basket of six major currencies, last traded at 95.984 , having risen to as high as 96.108 on Friday, its strongest level since Sept. 1.

U.S. consumer prices rose more than expected in August, data on Friday showed, pointing to a steady build-up of inflation that could allow the Fed to raise interest rates this year.

The so-called core CPI, which strips out food and energy costs, rose 0.3 percent last month, the biggest increase since February. The core CPI increased 2.3 percent in the 12 months through August.

U.S. short-term interest rate futures are now implying a 55 percent chance of the Fed raising interest rates by December, compared to around 47 percent on before the CPI data, according to CME Group’s FedWatch Tool.

The implied probability of the Fed raising interest rates at its policy meeting this week remains low, at 12 percent.

It remains to be seen whether the U.S. central bank will manage to raise interest rates by December without triggering a bout of dollar strength and to keep markets believing that it is ready to do so, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.

“That will test its (the Fed’s) skill and will hinge on how they communicate,” Ino said.

A rise in the dollar can increase disinflationary pressures on the U.S. economy, a point touched upon recently by a Fed policymaker.

Fed Governor Lael Brainard had said last Monday that low interest rate policies across advanced economies could make the United States more vulnerable to spikes in the value of the dollar which could put downward pressure on inflation.

The euro held steady at $1.1160, having touched a low of $1.1149 earlier on Monday, its lowest level since Sept. 6.

Against the yen, the dollar eased 0.1 percent to 102.20 yen . Trading conditions in the yen are likely to be thinner than usual, with Japanese financial markets closed for a public holiday.

All eyes this week will be on the policy meetings by the Fed and Bank of Japan on Sept. 20-21.

“Everyone’s focusing on what will happen on Wednesday so moves could be very limited today and tomorrow,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, referring to the dollar against the yen.

Sterling nursed its losses after shedding 1.8 percent on Friday and was last trading at $1.3032, up 0.3 percent on the day.

Major currencies showed little reaction to news of three attacks across the United States over the weekend, involving bombings in New York City and New Jersey and a stabbing rampage at a Minnesota shopping mall.

There was little sign of investor risk aversion across financial markets, with the risk-sensitive Australian dollar edging up 0.3 percent to $0.7519, while U.S. S&P stock futures edged up 0.3 percent.

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